Opinion
Decided 23, 1936.
Corporations — Stockholder's derivative suit against corporation president — President secured personal option on corporation's controlling shares of stock — Agreement that future dividends be part of purchase price — Dividends paid for stock — Not error to decree stock purchased with corporate assets, when.
Where the facts disclose that the president and general manager of a corporation secured a personal option to purchase the controlling shares of stock in such corporation under an agreement that all dividends declared by the corporation previous to the actual acquisition of the stock should be applied as a proportionate decrease in the amount to be paid therefor, and that a substantial dividend was declared the day the sale was consummated, and two dividends were declared thereafter when the corporation was entirely controlled by the president and general manager, the sum of the dividends being more than enough to pay for the stock, it is not error to decree that the stock is the property of the corporation, acquired with its assets by its president and general manager acting for and on its behalf.
ERROR: Court of Appeals for Cuyahoga county.
Messrs. Calfee Fogg, for plaintiff in error. Mr. Charles S. Wachner and Messrs. Malcolm Molner, for defendants in error.
This is a proceeding in error from the Court of Common Pleas of Cuyahoga county, wherein that court rendered judgment for the plaintiff who brought a derivative stockholders' suit for the benefit of the Peerless Corporation, a Virginia corporation, seeking thereby to acquire for the corporation certain stock or its equivalent, such stock having been appropriated by the plaintiff in error, although paid for with the property and assets of the corporation.
The pertinent facts are not seriously disputed by the parties.
The Peerless Corporation was and is a Virginia corporation. Prior to 1931, it was actively engaged in business in Ohio, with its major activity in Cleveland. Its name was changed from the Peerless Motor Car Corporation during the pendency of this litigation. It was authorized by its charter to purchase, retire, redeem, hold, cancel, retain, reissue, and dispose of the shares of stock of the corporation in such amounts and in such manner and upon such terms as the Board of Directors might deem expedient.
In December, 1931, by proper authority, the par value of the shares was reduced from $10 to $3 per share, its present status.
In July, 1929, James A. Bohannon, the plaintiff in error, was made president and general manager of the corporation, which office he continued to hold throughout the period during which the facts herein considered were involved. He received a salary varying from $30,000 to $36,000 per year.
In 1930, Bohannon was successful in interesting new capital in the corporation to an amount in excess of $1,300,000. On November 6, 1931, the Virginia corporation surrendered its right to do business in Ohio, however, maintaining control of its former affairs through two subsidiary corporations in Ohio.
In June, 1931, one Judson, then the owner of more than 100,000 shares of the Peerless Corporation stock, presented three conditional offers to the company: First, to make him chairman of the board of directors of the corporation at a salary of $50,000 per year; or, second, liquidate the company; or, third, purchase his stock.
After due deliberation, the board of directors decided to accept the third conditional offer and purchased all of Judson's stock at a price of $3.50 per share.
Soon thereafter, the Van Sweringen interests in Cleveland becoming aware of the Judson transaction made a similar demand and the company purchased from them 33,000 shares at the same price, $3.50 per share.
Policy and law then dictated that a general offer to all stockholders be made and in December, 1931, the president was authorized to purchase for the corporation up to 50,000 shares from any stockholder or stockholders at a price not to exceed $3.50 per share.
In January, 1932, the board was advised of the completion of the Judson and Van Sweringen transactions, and that 55,000 shares in addition had been acquired from other stockholders. At this meeting the previously adopted policy was widened and the offer to purchase from any and all stockholders their entire holdings at $3.50 per share was directed to be communicated to all the stockholders of the company. The expiration date was at first fixed at February 20, 1932, and later extended to March 18, 1932. Some 20,300 shares were acquired by the company under this last offer.
In January, 1932, Bohannon sold to one Bendix about 30,000 shares of the corporation stock at $5 per share. These shares constituted almost his entire holding in the corporation. Bendix was, during this time, in substantial control of the corporation and endeavored to induce the corporation to purchase the assets and property of The Marshal Asbestos Company, at a figure in the neighborhood of half a million dollars. Investigation showed that this concern was not one which could be acquired by the corporation with any great benefit to the company, especially at the figure stated, and the transaction was blocked. It then appeared that Bendix was heavily indebted to certain bankers and that his stock had been hypothecated with Hayden, Stone, More Schley of New York. The bankers brought pressure insisting that either the company purchase the Bendix stock, at $4.50 or $5 per share, or put him in complete charge of the corporation with a free hand to purchase the Marshal Asbestos Company, or that the corporation liquidate.
In April, 1932, the corporation had available some one million dollars. Bohannon about this time commenced private negotiations with Bendix and his bankers, the net result of which was that Bohannon personally was given an option to purchase the Bendix stock at $4.30 a share before May 1, 1932, and $4.60 a share before June 15, 1932, but under a distinct agreement that all dividends declared by the corporation previous to his actual acquisition of the stock should be applied as a proportionate decrease in the amount to be paid by Bohannon therefor.
The purchase of the Bendix and related stock was consummated by Bohannon April 25, 1932. This involved a transfer of 112,233 shares.
The Board of Directors on the 8th day of April, 1932, had authorized a dividend or distribution to be made on all stock of $3 per share, to be paid on the day the Bendix-Bohannon sale was consummated, that is, April 25, 1932. The price of the Bendix stock according to the agreement was thereby reduced to $1.30 per share. On April 28, 1932, the corporation, now entirely in control of Bohannon, made a second distribution of one dollar per share, and on October 25, 1932, a last distribution of fifty cents per share, or a total of $4.50 per share, just twenty cents per share more than Bohannon had paid Bendix for his holdings.
This action was instituted on behalf of the corporation, with the object of having the stock so acquired by Bohannon decreed to be the property of the corporation by reason of the contention of the complaining stockholder that it was in truth and in fact acquired by Bohannon with the assets of the corporation and that by reason of his position with the company he was bound to act for it and on its behalf.
One other significant fact must be noted before passing on to a consideration of the law applicable to these facts. The corporation has from the beginning vigorously resisted being brought into the case and is now in a collateral proceeding in error still vigorously resisting the jurisdiction of the court over its person, although the judgment of the trial court decreed the restoration of the stock or its equivalent among the assets of the company. It is also significant that although in this court Bohannon and the corporation are now represented by different counsel, in the trial court the same counsel represented both Bohannon and the Peerless Corporation. Certainly such a fact (and it is a fact which may be considered) is not calculated to strengthen the foundation of integrity upon which the plaintiff in error insists he stands.
The principal case relied upon by plaintiff in error is that of Du Pont v. Du Pont, 256 F., 129 (certiorari denied, 250 U.S. 642, 39 S. Ct., 492, 63 L. Ed., 1185). A perusal of the third paragraph of the syllabus of this case develops immediately a substantial basis upon which that case is distinguished from the present case under consideration. The court in considering the relationship of majority to minority stockholders recognized the obligations resting upon a director or officer who deals with matters in which the corporation as a whole has a vital interest. The court, at pages 184 and 185, quotes from Clark on Corporations (3d Ed., Wormser), pages 562 and 563:
"`Nor can the holders of a majority of the stock of a corporation so conduct and manage its affairs in their own interest, or in the interest of others, as to oppress the minority, or commit a fraud upon their rights. If they attempt to do so, a court of equity will, in a proper case, grant relief, at the suit of the minority. However, the judgment of the majority is not lightly to be set aside, and fraud or oppression must clearly appear. "The holders of a majority of the stock of a corporation may legally control the company's business, prescribe its general policy, make themselves its agents, and take reasonable compensation for their services. But, in thus assuming the control, they also take upon themselves the correlative duty of diligence and good faith. They cannot lawfully manipulate the company's business in their own interests, to the injury of other stockholders." It is not every question of mere administration or of policy in which there is a difference of opinion among the shareholders that gives the minority a right to claim that the action of the majority is oppressive, and to come into a court of equity for relief. Generally, the will of the majority must govern, if its action is within its corporate powers. "The court," it was said in a New York case, "would not be justified in interfering, even in doubtful cases, where the action of the majority might be susceptible of different constructions. To warrant the interposition of the court in favor of the minority shareholders in a corporation or joint-stock association, as against the contemplated action of the majority, where such action is within the corporate powers, a case must be made out which plainly shows that such action is so far opposed to the true interests of the corporation itself as to lead to the clear inference that no one thus acting could have been influenced by any honest desire to secure such interests, but that he must have acted with an intent to subserve some outside purpose, regardless of the consequences to the company, and in a manner inconsistent with its interests."'"
The actions of the plaintiff in error are patent and bold, and from these very characteristics he seeks to clothe his conduct with the cloak of integrity. The manifest purposes prompting his conduct are, however, powerful enough to strip from him this garment. So denuded, he presents the spectacle of one using his powers as an officer and director for selfish objects completely antagonistic to the interests of the corporation and in direct opposition to a course and plan of procedure definitely embarked upon by the corporation for its general benefit.
The eyes of a court of chancery may not be closed by mere technical adherence to strict legal procedure, where it is also apparent that by the use of such pharisaical conduct the equally substantial principles of equity have been flouted and ignored. Equity will always penetrate the guise of legality to find the presence of inequality and injustice.
The Bendix-Bohannon contract coupled with the concurrent and subsequent distribution of the assets of the corporation, meeting the entire cost of the transaction to Bohannon, resulting in his acquisition of the Bendix stock and complete control of the corporation, even to the extent of compelling it to work against its own interest in this litigation, presents a situation calling for action by a court of chancery, producing the result which should have been accomplished had the offending party the slightest appreciation of his obligations to the corporation, as the responsible officer involved.
The Dupont case is cited in Presidio Mining Co. v. Overton, 261 F., 933, 961 (9th Circuit Court of Appeals). This again is a case illustrating conduct of an officer consistent with the high demands of his fiduciary character. In the 5th paragraph of the syllabus it is stated:
"The general manager of a mining company, who was also a director, in acquiring adjoining ore land, which he leased to the company, held not to have acted fraudulently, so as to create a constructive trust in favor of the company, but openly and fairly, by offering the company the benefit of his purchase, and by his purchase and lease enabling the company to continue its operation at a profit."
Again in Bisbee v. Midland Linseed Products Co., 19 F.2d 24 (8th Circuit Court of Appeals), the court considered the Du Pont case. We quote paragraphs 1, 4, and 9 of the syllabus:
"Directors, officers, majority stockholders, and those in control of liquidation of corporation occupied toward corporation and stockholders, in respect to corporation's business and property, a fiduciary relation or sub modo trusteeship, and could not deal with corporation's property for their own personal benefit or advantage."
"Whether officer of corporation may in his own behalf purchase stock of corporation, depends on whether it is his duty to purchase such stock on behalf of corporation."
"Directors and other officers of corporation, occupying fiduciary relation toward corporation, are not permitted to assume positions which will bring their private interests into conflict with their corporation."
In the Virginia act it is provided that the capital stock may be decreased by purchase of the stock for retirement. This negatives any conclusion that the corporation may not deal in its own stock as a corporate function.
We note with interest certain statements of the United States Court of Appeals for the 10th Circuit in Arn v. Dunnett, 71 F.2d 912-918, quoting from page 918:
"Corporate entity may be disregarded where not to do so will defeat public convenience, justify wrong, protect fraud, or defend crime. Pierce v. National Bank of Commerce, (C.C.A. 8), 13 F.2d 40, 47; Boatright v. Steinite Radio Corp., (C.C.A. 10), 46 F.2d 385, 388; Hamilton Ridge Lumber S. Corp. v. Wilson, (C.C.A. 4), 25 F.2d 592; Maloney Tank Mfg. Co. v. Mid-Continent Petroleum Corp., (C.C.A. 10), 49 F.2d 146, 147.
"An officer or director of a corporation while not a trustee in the technical sense of the term, occupies a fiduciary relation to its stockholders with respect to corporate transactions.
"An officer or director of a corporation, in any transaction where it is his duty to guard the interests of the corporation and its shareholders, may not directly or indirectly make any profit or acquire any personal benefit or advantage not also shared by the other stockholders, but must account for and yield to his beneficiary any such profit.
"In Commonwealth T. Ins. Trust Co. v. Seltzer, 227 Pa., 410, 76 A. 77, 79, 156 Am. St. Rep., 896, the whole of the capital of the A corporation was invested in certain real estate which the B corporation desired to purchase. The president of the A corporation entered into a contract with the agent of the B corporation, whereby the agent agreed to buy from the president a majority of the stock of the A corporation. Whereupon the president and a director of the A corporation collusively purchased enough of the stock in the A corporation to gain control thereof, and delivered it to the agent in pursuance of such agreement. Thereupon the real estate was sold and deeded to the B corporation for a price not found to be inadequate.
"Certain of the stockholders, believing that the officers had so manipulated the sale of the property as to make a secret and illegal profit to themselves at the expense of their corporation, filed a bill against the president, directors, and other officers of the A corporation to recover such profits. The court said:
"`The director of a corporation is a trustee for the entire body of stockholders, and by assuming the office he undertakes to give his best judgment in the interests of the corporation in all matters in which he acts for it, untrammeled by any hostile interest in himself or others; and all secret profits derived by him in any dealings in regard to the corporate enterprise must be accounted for to the corporation. Bird Coal Iron Co. v. Humes, 157 Pa., 278, 27 A. 750, 37 Am. St. Rep., 727. In scrutinizing the acts of such officers, the court will not heed mere forms when the substance which lurks behind them shows profits from a dealing in the corporation property.'"
It is our conclusion that no error prejudicial to the plaintiff in error intervened in the judgment of the trial court, and that judgment is, therefore, affirmed.
Judgment affirmed.
MATTHEWS and HAMILTON, JJ., concur.
ROSS, P.J., MATTHEWS and HAMILTON, JJ., of the First Appellate District, sitting by designation in the Eighth Appellate District.